FINANCIAL MARKET VARIABLES DO NOT PREDICT REAL ACTIVITY

The past decade has seen an extensive empirical reassessment of the in formation content of financial market variables sensitive to monetary policy. Particularly provocative are recent papers suggesting that som e interest rates and interest rate spreads contain more information ab out economic activity than monetary aggregates. This paper reviews imp ortant methodological pitfalls in these studies. We then show that non e of the commonly employed measures of monetary policy contain increme ntal information useful in forecasting real economic activity. Two con clusions are possible. Either monetary policy innovations have no sign ificant real effects, or we (collectively) have failed in our efforts to measure monetary policy. (JEL E52).